Investment Subsidy

42 Pages Posted: 8 Feb 2015

See all articles by Norvald Instefjord

Norvald Instefjord

University of Essex - Essex Business School

Vivekanand Nawosah

University of Essex

Pei Yang

University of Essex

Date Written: February 2, 2015

Abstract

Just as it may be optimal to regulate firms that produce negative externalities, it may be optimal to provide subsidy to firms that produce positive externalities. This paper studies the optimal provision of subsidy to maximize the value of these externalities, and also whether there are policy measures that can enhance the welfare of investment subsidy. We consider both first-mover advantages in the market for subsidy (often associated with FDI subsidy) and free riding (often associated with green investment subsidy). We study the factors that influence the timing of investment subsidy, which in our model explains the activity in a given investment subsidy market. If the subsidy is offered early we expect there will be high activity, and conversely if the subsidy tends to be deferred to a later stage we expect there will be low activity. There are policy implications of the model, in particular we discuss an international "taxation" scheme which recovers welfare losses arising from too high or too low activity in the investment subsidy markets.

Keywords: FDI investments, Green investments, Investment subsidy, Preemption risk.

JEL Classification: D92, E62, G31, H21.

Suggested Citation

Instefjord, Norvald and Nawosah, Vivekanand and Yang, Pei, Investment Subsidy (February 2, 2015). Available at SSRN: https://ssrn.com/abstract=2561358 or http://dx.doi.org/10.2139/ssrn.2561358

Norvald Instefjord (Contact Author)

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Vivekanand Nawosah

University of Essex ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

Pei Yang

University of Essex ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

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